Introduction to Margin trading
Trading in cryptocurrencies is a profitable investment option. However, not everyone has the money to make it big in the market. Margin trading is a solution for those confident in their skills to invest but do not own the cash. And it is not only the crypto market where margin trading prevails. It is one of the most sought-after choices by experts in all the trade markets.
What is Margin Trading?
Margin trading is a method of trading where a third party provides funds to the trader to trade in an asset. It allows traders access to more funds, thus higher investments, and more profits, even for the same ROIs. This method is popular, especially for less risky investments. Still, it has found its way into volatile crypto trading as well. That is because mostly the margin funds in crypto markets get their funds from the crypto traders who receive an interest when someone borrows their money. Some exchanges provide the funds as well.
How does it work?
Even though other people provide the money for the trader to ride on, it is not charity. To initiate a margin trade, the trader has to commit some capital from their pocket. This fund is called margin and is strongly related to how much funds one can get. The money raised against this capital is called leverage. Every market and platform has a different leverage rate. A ratio of 100:1 would mean that the trader needs to commit $1 from their pocket to initiate a $100 trade.
Margin trading has the upside of bringing in more profits without the trader having to transfer huge sums from their account or risk all of their money. Additionally, it is a good tool for diversification as well, and when added with reliable crypto signals, it becomes highly successful. However, the greater the reward, the greater is the risk as well. Just as the vast investment can bring in more profits with even a slight fluctuation, the same is the case with losses. Even a small price drop causes losses that are hard to cover. When the price drops significantly, the trader gets a margin called where they need to commit extra money to their margin account to reach the threshold of the total margin requirements. If the trader doesn’t do that, their holdings get liquidated to pay back for the losses.
Margin Trading is an inherently risky business, and investors who do not like this much risk are much reluctant to the proposal even with the chance of high profits it brings. The same is the case for beginner traders, who should also avoid margin trading as even experts are very prone to risk in this case.
The crypto exchanges have come up with a solution to this problem where they pool money in the margin funds. These margin funds are used by loaning the money to traders doing margin trading. The investors get their money back after a while and receive interest as well. It is much less risky than direct margin trading, as the crypto exchange shields the investor.
Margin trading is a risky investment option. More so in the case of the volatile crypto market. Anyone thinking about it should have considerable trading experience and expertise in technical analysis before delving into this option. And even so, Caution remains a priority. The risk is as high as the possible rewards. Cryptocurrency trading signals can always help as a guide to mitigate such risks.